Gold's 11% Plunge "Overdue, Unsurprising" - August 25, 2011

THE PRICE OF GOLD in professional wholesale dealing sank further on Thursday morning, plunging to a 9-session low of $1704 early in London – a drop of more than $200 per ounce from Tuesday's new record high.

"[But] the spectre of higher core inflation [as highlighted by last week's US consumer-price data] can only add to the attractiveness of gold, especially with interest rates so low.

"This makes the 11% decline since Tuesday’s peak seem all the more bizarre."

Pointing to what he calls "the key level on the weekly chart of $1729," Russell Browne at Scotia Mocatta says that a "break of this level would indicate an 'Outside Week' [with prices setting new highs but falling sharply lower] and warn of a deeper correction."

The 11% fall in the gold price "would be more concerning" however, says a note from Mitsui's London team, "were it not for the fact that gold's meteoric rise over the past month makes retracements of this size relatively unsurprising.

"Moreover, we maintain that the economic fundamentals that have been bullish for gold remain so, and that corrections such as this do not make the target price of $2000 any less realistic."

Wednesday brought heavy sales of gold both in the US derivatives and exchange-traded trust fund markets.

The SPDR Gold Trust ETF – larger by value than even the S&P500 ETF on Monday – shed another 26 tonnes of bullion as share-holders exited the fund, taking this week's tonnage drop to 4.5%.

US derivatives exchange the CME meantime raised margin payments on its gold futures for the second time in two weeks, taking the initial and maintenance payments to trade 100-ounce contracts more than 55% higher from mid-August.

"The margin hike...contributed to the liquidation," reckons David Thurtell at Citigroup.

"A lot of hot money has entered the complex and the rally was done too much in too short a time."

Citing volatility in gold prices as the reason – rather than the absolute price level – "I think we're seeing more and more diversification in people's portfolios," said CME executive chairman Terry Duffy to FoxBusiness overnight.

"Commodities are now definitely [used]...for diversification, where 10 or 12 years ago people didn't [even] see them as an asset class."

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen's Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

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